2019 (1) TMI 1816 - AT - Income Tax

Tribunal allows appeal: No disallowance for personal expenses by directors in Private Limited Company

HIndumal Balmukund Investment Co. Private Limited Versus ITO, Ward-11 (5), Pune

The tribunal allowed the appeal, holding that there should be no disallowance of expenses for personal use by directors in a Private Limited Company. ... Depreciation on cars for personal use by the directors of the assessee company - AO noticed that the cars were not purchased in the name of the assessee but its directors thus made disallowance invoking the provisions of section 38(2) - HELD THAT:- AO has basically made disallowance u/s. 38(2) of the Act. The very fact that he allowed depreciation @ 50% of the amount claimed on cars goes to prove that he accepted the ownership of cars in the name of the assessee company. Hon’ble Gujarat High Court in Sayaji Iron and Engineering Company [2001 (7) TMI 70 - GUJARAT HIGH COURT] has held that there cannot be any disallowance of personal expenses for cars on account of personal use by the director. It has been further held that no disallowance can be made even by treating such expenditure as not having been incurred for the business purpose. Similar view has been taken by the Delhi Bench of the Tribunal in several cases including Dy. CIT vs. Haryana Oxygen Ltd. [1999 (12) TMI 107 - ITAT DELHI-D]. Thus it is evident that there can be no disallowance on account of personal use by the director-employees of the assessee. Such an amount can be treated as a perquisite in the hands of the employees - Decided in favour of assessee. Issues:Confirmation of disallowance of depreciation on cars for personal use by directors of the assessee company.Analysis:The appeal pertains to an order by the CIT(A)-1, Pune for the assessment year 2012-13. The sole issue raised is the disallowance of depreciation on cars for personal use by directors of the assessee company. The AO disallowed Rs. 2,08,267, being half of the depreciation claimed, as the cars were not purchased in the name of the assessee but its directors, invoking section 38(2) of the Income-tax Act, 1961. The AO's acceptance of ownership of cars in the name of the assessee company is evident from allowing depreciation at 50% of the claimed amount. However, the tribunal noted that there cannot be any disallowance of expenses in the hands of a company for personal use, even by its directors, citing judicial precedents.The tribunal highlighted that as a Private Limited Company, there should be no disallowance of expenses due to personal use by directors. Citing the decision of the Hon'ble Gujarat High Court in Sayaji Iron and Engineering Company vs. CIT, it was emphasized that no disallowance can be made for personal expenses on cars used by directors. The tribunal also referred to similar views taken by the Delhi Bench of the Tribunal in various cases. It was concluded that any amount related to personal use by director-employees should be treated as a perquisite in their hands. Consequently, the tribunal held that the CIT(A) was unjustified in upholding the disallowance and proceeded to delete the addition. The appeal was allowed, and the order was pronounced in the Open Court on 30th January 2019.